Portfolio rebalancing is taken as an article of faith by many investors and financial advisors, believing that it helps to control the risk in an investment portfolio at a level appropriate to the investor’s risk appetite, even at the cost of giving up some investment returns. But this is not what some well known investors like Benjamin Graham, or Warren Buffett subscribe too, believing more in their investment thesis and not giving up future gains.
We find that there is no conclusive evidence that portfolio rebalancing is the best approach for every situation and investing environment – in some cases, not rebalancing actually helped to reduce overall risk! So is portfolio rebalancing necessary? Not always, even for passive investors who do not have a view on the direction of the assets they are holding.
Is rebalancing your investment portfolio necessary? Portfolio rebalancing is usually defined as the process
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